Transcript Preliminary and for discussion only

Preliminary conclusions and tentative
policy options
Hidden Economy Workshop
Budapest
December 5-6, 2007
Preliminary and for discussion only
Notes (1)
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Informality only part of fiscal problem
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Fiscal only part of informality problem
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Hungary already collects high % of GDP in
taxes. Expenditures very high.
Concerns should also include competitiveness,
social welfare
Tradeoffs in combatting informality
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Slow down economic growth? Price people out
of economy?
Preliminary and for discussion only
Notes (2)
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Terms of reference for study emphasize concrete
recommendations …
But need for underlying analysis
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Scale and composition of informal sector
Understanding incentives, motivations
Attitudes
As well as analysis of specific areas for potential
interventions
Weak evidence base internationally on what works
in terms of specific interventions
Preliminary and for discussion only
Simple model of informality and needed
responses
Informal economy
due to
Exclusion because of
regulatory and other barriers
Exit when entrepreneurs and
workers choose to operate
informally
Requires
Removal of barriers to
operate formally
Reducing the costs and
increasing the benefits of
operating formally (Carrots)
and
Increasing the costs and
reducing the benefits of
operating informally (Sticks)
Preliminary and for discussion only
Potential areas for reforms
Tax
and benefit systems
Business and labor market regulations
Enforcement and sanctions
Public information and education
Note that following policy ideas are
preliminary and incomplete
Preliminary and for discussion only
Tax and benefit systems (1)
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Most important area for addressing undeclared
economic activity/employment
Taxes create disincentives for formalization
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But they are also not competitive with tax regimes in
neighboring countries
So tax reform needs to be based on overall
efficiency and competitiveness (within framework
of fiscal consolidation) and not just “whitening” the
economy
Preliminary and for discussion only
Tax and benefit systems (2)
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Labor taxes (PIT, social contributions) are high and
discourage formal employment, especially low-wage
labor
Favorable tax treatment of non-labor income
encourages underreporting of employment
earnings
Further disincentives created by serious spikes (e.g.,
employment income tax credit)
Design of social benefits and programs likely
encourages undeclared work
Preliminary and for discussion only
Tax and benefit systems (3)
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To extent feasible, employer social insurance
contributions should be reduced
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Compensate for reductions in revenues with other
taxes (e.g., dividend, VAT, real estate)
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Targeted reductions for workers overrepresented in lowwage employment have biggest impact on formalization
Set revenue target and allocate any added revenues due to
better compliance to tax rate cuts in next year
More comprehensive reform -- Flat tax with high
personal exemption and comparable rates for
earnings and profits?
Preliminary and for discussion only
Tax and benefit systems (4)
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Employment tax credit – encourages formalization
but more gradual phasing out
Assess minimum contribution base as double
minimum wage – do added receipts justify
decreases in formal employment?
Consider other options to tie social
contribution/tax bases to assumed productivity
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E.g., Bulgarian example of differentiated minimum
thresholds determined by social partners
E.g., Presumptive taxation of self-employed and small
companies
Preliminary and for discussion only
Tax and benefit systems (5)
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Evidence suggest prevalence of combining
undeclared work with receiving public beenfits
For unemployment benefit (and some social
assistance) recipients
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Implement “activation” policies – closer monitoring and
stricter job search requirements, combined with subsidies
for hiring employers; and/or
Allow some earned income while collecting benefits
High proportion of older workers are undeclared
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Are reforms in pension/disability provisions needed?
Preliminary and for discussion only
Business and labor market regulation (1)
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Assessment that regulation is not a major factor
Business regulation reforms in recent years have
reduced costs of compliance
Further steps
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Complete planned reforms for business start-ups
Simplify licensing procedures
Preliminary and for discussion only
Business and labor market regulation (2)
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Although some employers cite labor market
regulation as a problem, review suggests that it is
not a serious barrier to formal employment
Minimum wages should be kept relatively low
Involve social partners in fight against undeclared
work
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E.g., commitment to fight undeclared work in collective
agreements
Preliminary and for discussion only
Enforcement and sanctions
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Tax collection efficiency lower than in other EU
countries
Consider further consolidation of various
institutions
Should APEH be restructured (by taxpayer, not
function)?
Labor inspectorate – investment in training and
exposure to latest international practices
Preliminary and for discussion only
Public information and education
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Segmented communication plan
Position tax evaders as minorities and underline
criminal nature of evasion
Address fairness issue by highlighting sanctions on
rich and powerful
Link tax paying with publicly provided services and
benefits
Preliminary and for discussion only